London CIV’s responsible investment head sees ‘a disconnect between asset owners and managers’

London CIV is the Local Government Pension Scheme for the London Boroughs and the City of London. With 32 partner funds, it has the largest number of shareholders among the UK's 8 LGPS funds. 

The pool currently manages £26.6bn in pooled assets, approximately half of which are passively managed and half actively, including some in-house strategies. In total, the partner funds hold some £48bn in assets. 

The majority of London Authorities have set ambitious net zero targets for their pension funds and London CIV itself plans to be net zero by 2040.

The pool has taken an active stance at this year's AGM season and backed among others the ClientEarth lawsuit against Shell. 

But with most of the activist shareholder resolutions having been defeated, Net Zero Investor speaks to Jacqueline Jackson, head of responsible investment at London CIV about the growing disconnect between asset owners and managers when it comes to stewardship. 

You have followed a strategy of systematically engaging with oil and gas companies. Do they account for the lion share of the carbon footprint in your listed equity portfolio?

Yes. We are not massively exposed to these sectors but where we are, they do often make the top contributors either in terms of actual footprint or intensity. For us it is important to be engaging with various oil and gas companies, we didn’t want to be singling out specific organisation, so we did quite a lot of due diligence. We looked at the transition strategy for individual oil and gas companies and tried to come up with an engagement strategy that is end-to-end.

This doesn’t just expand to the oil and gas majors themselves, we have also started to look at fossil fuel exploration and investment from large financial institutions. We must also give due credit where appropriate to companies that may indeed possess a significant footprint but have a commendably robust transition strategy, as demonstrated for example by Equinor.

We have taken a deliberate and personalised approach in engaging with companies, considering the nuanced challenges they face. Our strategy has been characterised by being both targeted and tailored to ensure effective communication and support.

If we look at the proposals put forward at this year’s AGM season, there seems to be a trend from just having shareholder resolutions on energy transition strategies towards directly targeting directors. But if we look at voting results, this has not been successful. What do you think are the next steps now?

It is telling that there has been slightly more support for shareholder resolutions to publish better transition strategies and less so for voting against directors or chairs. That sounds about right, as organisations are considering their next approach, in a less dynamic or conventional approach to engagement, where immediate escalation is not warranted, you might vote for a shareholder resolution to publish data or improve the transition strategy.

This grants them the opportunity to make improvements or publicly share relevant information. Only if you are not satisfied then might the next engagement measure be to target a board or a chair. The collective decision of numerous asset owners to vote in favour, as witnessed during the Shell AGM, is probably attributable to a series of unsuccessful engagements and a range of concerns that have piqued the interests of investors and asset owners. The heightened focus on climate change risks, driven by the priorities of their members and clients, has likely motivated this united action.

I can see why the asset investor is more reliant on shareholder resolutions and transition strategies than they are on voting against chairs or boards in general. But we will need further engagement to encourage companies to follow the most crucial of these shareholder resolutions.

Do you engage with companies like Shell directly or mainly with other asset owners together?

We wrote a personalised letter to Shell and when we didn’t receive a response to that, we then supported the ClientEarth litigation by publishing our communications on the matter. We have also backed several group efforts and co-signed letters..

Moving forward, we want to continue supporting the other major asset owners that have signed up to this. We have generally been very joined up on this, throughout the various activities that have unfolded, certain names consistently emerged, including the Church of England, Nest to Brunel Pension Partnership, Scottish Widows, ourselves and a number of others.

There are always a handful of familiar faces supporting these resolutions but then you get big investors, for example fund managers like BlackRock, StateStreet or Vanguard on the other side of the spectrum. Do you feel like there is a disconnect between asset owners and asset managers as Faith Ward has recently pointed out?

I do think some asset managers seem to be in a position where they are maintaining two very different client bases and, in that instance, there can be a disconnect between what asset managers and owners are doing. Asset owners only really answer to their beneficiaries or members, asset managers seem to be juggling an array of asset owners, clients from different regions with divergent political viewpoints and are receiving both pressure and lobbying to support companies despite the climate risks. Sometimes prioritising short-term interests over long-term interests of pension funds.

This is why it is important that shareholders have voting rights to engage on behalf of their investments and why manager engagement is a critical part of our strategy. It does beg the question, what happens in the future when we will see more passive investments and if you are in a passive pooled fund, how do you think about going forward?

This is interesting because it comes at a time when there have been startups and setups which offer split voting arrangements for passives. Clearly the market is asking for it.

Even some LGPS investors hold passive strategies, and some have also outsourced their engagement.

Yes, we have had questions even from our clients about opportunities to provide split voting services. Whilst I think this can diminish impact, if you are investing in a fund alongside shorter-term investors in the US and you’re a long-term investor based in the UK, you are obviously going to hold a very different opinion and approach in terms of how you choose to vote. That is why it would be interesting to see to what extent it would sway activity. If all institutional investors had the opportunity to split votes and did so, what do we think the outcomes of those AGM’s would be? Perhaps voting consensuses are a result of limited resources or the ability to engage individually.

That’s why using additional external engagement support, as we do at London CIV, can be very beneficial as you can’t always just rely on fund managers or internal resource to capture the in depth, nuanced and regionally specific knowledge needed on specialist topics such as biodiversity. Furthermore, if you use multiple managers, which most LGPS funds do, the strength and focus of their engagement priorities will differ and you may want to harmonise efforts with a single source.

The reason we hear from the same funds more consistently may be due to the fact that some asset owners have dedicated responsible investment functions. With specialised roles focussed on responsible investment, climate and stewardship, it’s likely that these funds are more vocal on ESG matters, as dedicated staff members can spend all day looking at these issues. Conversely, there are plenty of asset owners who have members that care but simply haven’t developed, funded or built that sort of facility yet. That challenge may be the same with a range of different financial institutions worldwide.

Going forward, it will be interesting to see how much power responsible investment teams hold. If you told Jason Fletcher that you wanted the pool to divest from a fossil fuel producer, would he consider this?

Our chief investment officer (CIO) would support a decision to sell an investment if it is backed by sound reasoning from our Responsible Investment (RI) and Investment teams, and if all avenues of engagement with the relevant stakeholders have been exhausted. However, if the sale would violate the mandate of the underlying fund, we would engage in discussions with all investors and the investment manager to determine whether the Investment Management Agreement (IMA) or prospectus should be modified to allow for the sale.

In certain instances, Jason Fletcher has demonstrated a cautious approach when confronted with shareholders demanding scope 3 transition targets from energy companies, that refuse to engage on the matter, owing to the challenges associated for the sector. Interestingly, these companies have simultaneously promoted the scope 3 savings achieved by assisting customers in reducing their carbon footprints. Such flagrant disregard for the risks posed by scope 3 emissions can potentially make the CIO more open to discussing divestment or escalation strategies.

This type of discrepancy highlights the need for consistent and responsible practices within the energy sector. When companies refuse to acknowledge or address their scope 3 emissions while actively benefiting from promoting their scope 3 savings, it raises concerns about their commitment to long-term sustainability and climate change mitigation efforts. As a result, the CIO may be more receptive to engaging in discussions regarding divestment strategies or exploring escalation measures to hold these companies accountable for their actions.

The sustainable financial industry is rapidly realising that social priorities can very quickly translate into financial risks. This realisation has empowered RI teams to assert the significance of global ESG priorities, especially when they express dual materiality.

You do of course have quite ambitious net zero targets at London CIV, you want to be net zero by 2040. How do you reconcile that with your 32 partner funds who might all be at different stages in their transition?

30 of the London Local Authorities have declared a climate emergency and many have targets ranging from 2027 to 2050. Whilst this doesn’t immediately translate into all pension funds, our clients’ ambitions are relatively strong, we certainly didn’t want to set a target that was holding our clients back. If anything we wanted to have an earlier target and a broad fund range that would accommodate all of our clients’ investment strategies.

As our progress towards the target takes off, I believe globally industry will accelerate action. There may be a bit of a delayed transition but more momentum will begin to build both as investee companies accelerate towards their own net zero targets and the market moves, financial institutions divest and investment in new polluting sectors dwindles. There will be natural shift. A huge amount of progress towards market achievement will be down to market momentum, as much as it will depend on individual action.

How do you measure your carbon footprint?

We have 25 different carbon risk metrics. We procure data from S&P Global using their platform we then run our holdings data through that database, but we have automated it internally, so we can automate the calculation of our own footprint somewhat.

We also include all the standards metrics like weighted average carbon intensity, actual carbon emissions and we look at things like carbon earnings at risk based on transition risk and projected carbon pricing. We also look at 2-degree alignment and fossil fuel exposure.

When we first started our journey on tracking our investment process, we did use all the Trucst environmental metrics in order to uncover major culprits of GHG air and water pollution and identify hot spots of risk.

And how concentrated is that risk?

The issue here is that when it comes to things like land use risk, the data is less robust, which raises the question, is it really less material or is it simply less accurate? We have really focussed on climate for now and I think the entire industry has.

I remember five years ago, everybody was talking about water risk, that was a big topic, and suddenly society has shifted towards a stronger focus on climate risk. But I think other factors such as water risk are coming back.

It is interconnected, isn’t it?

Yes , we might see a more holistic view when the TNFD [Taskforce on Nature Related Financial Disclosures] picks up. Hopefully we will move towards more holistic reporting in finance which treats all of these issues as interconnected but I think we are still a couple of years away from that.